The Questor Column

Arm may find hopes are a little beyond its reach

ROBIN SAXBY, the architect of silicon chip designer Arm, deserves a bit of a breather. Back in 1990, he told his 12-strong team of engineers working out of a barn in Swaffham Bulbeck that their designs for a certain type of chip were going to become the global standard.

Eleven years on and the dream has come true. Advanced Risc Machines (as the company was then known) dominates its market and is one of the most highly rated companies in the world. Fair play then, that Mr Saxby should split his chief executive and chairman roles yesterday as he announced Arm's fifteenth successive bunch of forecast-busting results.

Third-quarter profits before tax rose 46pc to £12.9m, and the shares, which peaked at £10 when Arm was catapulted into the FTSE100 last year, were chased 9.75 higher to 308.75p on upbeat noises about prospects. At that level, the shares are selling on 96 times this year's forecast earnings and are clearly not pricing in a slip-up.

One analyst believes that the price is discounting over 15pc compound annual growth for the next 15 years (never mind 15 quarters) and argues that the dodgy state of the global economy makes that seem a tough prospect.

Arm has reached these dizzy levels on the back of the mobile phone boom. It is true that between 70pc and 80pc of mobile phones sold contain chips with Arm's designs. However, wireless customers contribute just 8pc of overall revenues.

Nevertheless, the share price is closely linked to the mobile phone market: in the past three months Arm shares have risen 51pc, compared with Nokia, up 10pc, both outperforming the sector.

If Nokia makes positive noises about the mobiles market at its third-quarter results on Friday, Arm shares could get a further fillip, but if you are one of those sitting on a profit, it might be a good time to cash it in, however good the company it is.

Houses not so safe

HOUSEBUILDERS have been basking in the favourable conditions of undersupply and the lowest mortgage rates for more than 40 years. But could an ill wind be creeping through the cracks in the windows?

So far, they've looked safe as houses, but Prowting's financial year begins a couple of months after the majority of its peers. Yesterday's six-month figures provided us with a picture of conditions sector-wide during the quiet months. The foundations are still secure, but the roof is beginning to look a bit leaky.

The last two months have been very eventful, and nobody is sure what to expect. Prowting said yesterday that reservations of new houses since September 11 have fallen by about 20pc on last year, which raises concerns about consumer confidence.

This has been reinforced by a recent report from the Joseph Rowntree Foundation claiming that house prices will fall from January. That's not a disaster for most housebuilders, because the draconian planning system will ensure that demand continues to outstrip supply. However, a fall in house prices could cause many to fall short of their targets.

Margins will tighten if prices fall, because housebuilders have already bought expensive land to build houses on. Many companies may also find it necessary to provide incentives to lure dithering customers.

Prowting's margins fell from 13.4pc to 12.7pc in the six months to August. Analysts slashed their forecasts from £5m to £28m for the full year. The shares slipped 10 to 135p. They yield 5pc and trade at 5.4 prospective times earnings - in line with the sector.

Considering the shares are just 25p off a five-year high, it might be a good time for some profit taking. It may take a while for Bob the Builder to fix this.

The shoe won't fit this ugly sister

YOU may remember FII Group as the former Marks & Spencer shoe-maker which decided to turn itself into a tech stock last year. What a load of cobblers.

After Marks & Spencer dumped the company in 1998, no one expected a fairytale ending. Like Cinderella's ugly sisters, the company tried its best to fit into some seriously unsuitable footwear, buying a £1.53m stake in wireless technology group Xtempus, which was supposed to be a precursor to a full merger.

Yesterday, it became abundantly clear that this company is never going to get to the ball, much less meet Prince Charming. The shares plummeted 82pc as full-year losses had ballooned from £414,000 to £7.9m, with sales falling from £21.7m to £20.5m.

That leaves the company looking less than well-heeled. Chairman Noel Jervis put on a brave face as he told shareholders they "deserve no less than a full account of events".

Poor old investors. They have been unable to sell the shares for 14 months, as they have been suspended after the Xtempus merger failed because Xtempus clinched a deal with a rival consortium.

The stock tumbled 83 yesterday, and shares are now at just 18p. Quite right too, given that FII has some serious problems to solve. These include a diluted stake in Xtempus worth a little over half a million pounds, which the company has written off, and an £18m pension fund deficit. That's more than four and a half times its market capitalisation.

The company's best chance of a happy ever after is if an unlisted suitor decides to reverse into it. Whatever happens, it will take a long time, if ever, for the business to get back into its old size nines. It's all a bit sole-destroying. Sell.